Axos Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2024, the third quarter of fiscal 2024. The filing also reports the nine months ended March 31, 2024. Financial statements are unaudited. Axos operates Banking and Securities businesses, including digital consumer and commercial banking, lending, securities clearing and custody, and investment services.
Financial performance and position
| Metric | Three months ended March 31, 2024 | Nine months ended March 31, 2024 |
|---|---|---|
| Net interest income | $261.6 million | $701.4 million |
| Provision for credit losses | $6.0 million | $26.5 million |
| Non-interest income | $33.2 million | $191.8 million |
| Non-interest expense | $133.2 million | $375.6 million |
| Net income | $110.7 million | $345.1 million |
| Diluted earnings per share | $1.91 | $5.88 |
| Net interest margin | 4.87% | 4.61% |
| Efficiency ratio | 45.20% | 42.05% |
At March 31, 2024, total assets were $22.6 billion, net loans were $18.7 billion, deposits were $19.1 billion, and stockholders’ equity was $2.2 billion. Cash, cash equivalents, and restricted cash totaled $2.35 billion. Borrowings, including FHLB advances and subordinated notes and debentures, totaled $420.4 million.
For the nine months, operating activities provided $261.7 million of cash; investing activities used $2.16 billion, primarily reflecting loan originations and purchases; and financing activities provided $1.86 billion, mainly from deposit growth. Period-end cash, cash equivalents, and restricted cash declined $36.2 million from June 30, 2023.
Regulatory capital ratios at March 31, 2024 included Axos Financial CET1 of 11.47% and total capital of 14.26%; Axos Bank CET1 was 12.47% and total capital was 13.49%. Management reported that both met applicable requirements and were “well capitalized.” Tangible book value per share, a non-GAAP measure, was $35.46.
Material changes versus comparable periods
- Quarterly net income increased from $79.9 million to $110.7 million year over year; nine-month net income rose from $219.8 million to $345.1 million. Nine-month results include a $92.4 million gain on the FDIC loan purchase.
- Quarterly net interest income grew 31.5% year over year, while net interest margin rose 45 basis points to 4.87%. Higher loan income reflected increased yields and average loan balances; higher deposit costs partly offset that benefit.
- For the nine months, total non-interest income increased to $191.8 million from $87.8 million, principally because of the FDIC acquisition gain. Excluding that gain and other specified adjustments, adjusted earnings were $289.3 million and adjusted diluted EPS was $4.93, both non-GAAP measures.
- Since June 30, 2023, gross loans rose to $19.3 billion from $16.7 billion and deposits rose 11.6% to $19.1 billion. Commercial and industrial non-real-estate loans increased to $4.8 billion from $2.6 billion.
- Nonperforming loans increased to $122.1 million, or 0.63% of loans, from $87.2 million, or 0.52%, at June 30, 2023. The allowance for loan losses rose to $257.5 million from $166.7 million, including $70.1 million initially recorded for acquired PCD loans.
- Stockholders’ equity increased $279.1 million from June 30, 2023, with nine-month earnings partly offset by $83.8 million of share repurchases.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings or growth guidance. Management says it considers liquidity sources stable and adequate for anticipated needs, but cautions that results may differ from forward-looking statements.
- FDIC loan purchase: In December 2023, Axos acquired two portfolios with $1.3 billion unpaid principal balance for $901.5 million fair value, including a $306.8 million non-credit discount and a $70.1 million PCD allowance. The transaction generated a $92.4 million gain. Management expects the acquired loans’ remaining-life yield to exceed that of the pre-acquisition portfolio; realized performance and discount accretion remain important to monitor.
- Credit quality: The allowance for credit losses was 1.36% of loans, while nonperforming loans were 0.63% of loans. The filing attributes provision increases principally to growth in commercial and industrial loans, the FDIC acquisition, and commercial real estate macroeconomic assumptions. Net annualized charge-offs were 0.07% for the quarter.
- Deposits and liquidity: Interest-bearing deposits totaled $16.3 billion and carried a stated period-end weighted-average rate of 4.21%. Deposits above the FDIC insurance limit or not collateralized were $2.1 billion. Brokered deposits were $1.84 billion. Available borrowing sources included $3.24 billion immediately available from the FHLB, $6.57 billion from the Federal Reserve discount window, and additional lines; none of the cited lines had outstanding borrowings at period end.
- Interest-rate risk: Management’s model estimated that an immediate 200-basis-point increase would raise net interest income 10.0% over the first 12 months, while a 200-basis-point decrease would reduce it 9.3%. These are modeled scenarios based on assumptions, not forecasts; actual results may differ.
- Legal matters: The company maintained a $16 million accrual related to the MUFG Union Bank litigation despite an appellate ruling vacating a $2.5 million contract-claim award; further appeal is planned. A separate derivative action is stayed pending an appeal in related employment litigation, and the company says the potential loss, if any, cannot be reasonably estimated.
- Other unusual items: Axos repurchased $5.0 million par value of subordinated notes for $4.2 million, recording a $0.7 million pre-tax non-cash gain. A new authorization permits up to $100 million of common-stock repurchases, in addition to the earlier program.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How acquired-loan collections, credit performance, and accretion of the FDIC purchase discount compare with management’s expectations, and how much future earnings depend on that transaction.
- Whether rising nonperforming loans, past-due balances, and commercial real estate exposures lead to further provisions or charge-offs.
- Deposit retention and pricing, including the effect of the 4.21% period-end interest-bearing deposit rate, brokered funding, and uninsured or uncollateralized deposits on margins and liquidity.
- Whether modeled interest-rate sensitivity and management’s liquidity assumptions hold under different rate, deposit-runoff, and economic conditions.
- Developments in the MUFG and derivative litigation, including any change to the $16 million accrual or the currently unquantifiable exposure.
- The contribution of share repurchases to per-share results and capital, alongside reported GAAP earnings and non-GAAP adjusted measures.